SINGAPORE (Reuters) – The yen extended its gradual decline against the dollar on Monday, with trading volume subdued due to a Japanese holiday. Market participants remain uncertain about the likelihood of a significant Federal Reserve rate cut next month.
This follows a volatile week marked by a sharp selloff in both currency and stock markets, driven by concerns over the U.S. economy and the Bank of Japan’s hawkish stance. The week ended on a calmer note, as stronger-than-expected U.S. jobs data on Thursday led markets to scale back expectations for Federal Reserve interest rate cuts this year.
Despite this, investors are still not convinced that the Fed can proceed slowly with rate cuts. Pricing from the CME Group’s FedWatch tool indicates expectations for 100 basis points of easing by the end of the year, a scenario typically associated with a looming recession.
As a result, markets remain highly sensitive to upcoming data and events, particularly U.S. producer and consumer price indexes due on Tuesday and Wednesday, the global central bankers’ meeting at Jackson Hole next week, and earnings from AI giant Nvidia (NASDAQ) later this month.
“Markets are squaring up a little ahead of the U.S. inflation data,” said Christopher Wong, currency strategist at OCBC Bank in Singapore.
Mizuho analysts cautioned that investors should keep an eye on other jobs and inflation data scheduled before the September Fed meeting. They described the current situation as “finely balanced,” with a “coin toss probability” ahead of this week’s inflation data.
By midday Monday, the dollar was up 0.4% at 147.15 yen. The euro held steady at $1.0920, while the dollar index remained flat at 103.18. A week earlier, the euro had reached as high as $1.1009, its strongest level since January 2.
The Australian dollar edged up slightly to $0.6584, while the New Zealand dollar hovered below last week’s three-week high of $0.6035, last trading at $0.6015. The Reserve Bank of New Zealand is expected to keep its key cash rate unchanged at 5.50% during its policy review on Wednesday.
Carry Trade Unwind
Wall Street closed higher last week, with E-mini S&P 500 futures finishing nearly unchanged after a steep 4.75% drop the previous Monday. Longer-dated Treasury yields also declined.
Last week, markets—especially in Japan—were rattled by the unwinding of the popular yen carry trade, where investors borrow yen at low costs to invest in higher-yielding currencies and assets. The violent selloff in the dollar-yen pair between July 3 and August 5, triggered by Japan’s intervention, a Bank of Japan rate hike, and the unwinding of yen-funded carry trades, caused the pair to drop by 20 yen.
Leveraged funds reduced their short positions on the Japanese yen to the smallest net short stance since February 2023, according to U.S. Commodity Futures Trading Commission and LSEG data released on Friday.
The yen reached its strongest level since January 2 at 141.675 per dollar last Monday. However, it remains down 4% against the dollar so far this year.
J.P. Morgan analysts revised their forecast for the yen to 144 per dollar by the second quarter of next year, suggesting that the yen will consolidate in the coming months. They expressed optimism about the dollar’s medium-term prospects, noting that “carry trades have erased year-to-date gains; we estimate 65-75% of positioning being unwound.”
Implied volatility in yen options has also decreased. After spiking to 31% on August 6, overnight volatility has since fallen to around 5%.
